Freetech Road Recycling Technology (Holdings) (HKG:6888) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Freetech Road Recycling Technology (Holdings) Limited (HKG:6888) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Freetech Road Recycling Technology (Holdings)

What Is Freetech Road Recycling Technology (Holdings)'s Debt?

The image below, which you can click on for greater detail, shows that Freetech Road Recycling Technology (Holdings) had debt of HK$93.7m at the end of June 2023, a reduction from HK$102.7m over a year. But on the other hand it also has HK$239.5m in cash, leading to a HK$145.8m net cash position.

A Look At Freetech Road Recycling Technology (Holdings)'s Liabilities

We can see from the most recent balance sheet that Freetech Road Recycling Technology (Holdings) had liabilities of HK$355.4m falling due within a year, and liabilities of HK$17.5m due beyond that. On the other hand, it had cash of HK$239.5m and HK$354.2m worth of receivables due within a year. So it can boast HK$220.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Freetech Road Recycling Technology (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Freetech Road Recycling Technology (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Freetech Road Recycling Technology (Holdings)'s load is not too heavy, because its EBIT was down 97% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Freetech Road Recycling Technology (Holdings) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Freetech Road Recycling Technology (Holdings) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Freetech Road Recycling Technology (Holdings) produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Freetech Road Recycling Technology (Holdings) has HK$145.8m in net cash and a decent-looking balance sheet. So is Freetech Road Recycling Technology (Holdings)'s debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Freetech Road Recycling Technology (Holdings) (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.